Long Overdue Update

Been a while!

Ended up finishing 2021 at 45% for the year. The year was relatively sub-par for the trading style so pretty happy with the result. This quarter has been very challenging, managing the whipsaw and the violent moves not to mention the volatility regime shift (always hurts when you go from low to high vol) but we pulled it off. With this new vol regime comes opportunity, as such I expect to close the quarter above 10%, not bad while the SPX is down -10-12%. Can’t complain. Along side of that, Q2 should be quite loaded as well since we’ll start it within a higher vol regime.

The plan was to remain systematic until a crash like event where we’d go discretionary and hands-on. I had shifted from systematic to discretionary on Jan 24th which brought about a lot more stress and workload and was as we learned today, completely unnecessary. We ran the systematic trading style through till today and had we remained systematic it would have done better and been 100x easier. So I am probably going to shift away from being discretionary during high vol events, at least as a main style. I just don’t see the point in muddying around if the systems work well. With this discretionary approach, I switched away from OTM as a focus and entered into ATM trades (using the ups and downs to form grand structures) but the whipsaw caught us a few times and that pro-longed bear rally run from Jan 24 bottom into mid Feb was quite challenging and stressful to manage as we had not fully encashed and we had removed several key components of risk in the OTM space. This market type gave us challenges on encasing the BSHs but we simply just delta managed those (roll and maintain delta) and we encashed based on that. This allows use to maintain some convexity regardless as we move forward.

April 1st will mark 2 years since I started the Peak Total Investment Fund SPC and we’ve managed to obtain around a 70% return which is great for 2 years. I expected and hoped for that result prior to launch, so having had 2 full years of out of sample (along with my 2 original years prior) and the fact that it aligns with expectations and testing is a testament. It hasn’t been an easy transition and as capital increases, it became more and more obvious the requirements for mandatory systems, back checks, and robust checklists. We’re developing ourselves more than we’re developing the trades.

All in all, what a ride the last 2 years have been. I love the markets and I love the game I get to play. It’s always a challenge and can be so rewarding. I also run a software company which has been in business for 20 years and involves over 40 people yet and it produces an awesome income/dividends but what 40 people can produce, I can do myself in front of a computer (for myself and other people). . That’s so insane. I guess that’s the reward of working hard on systems, back-testing and knowing yourself.

There’s two main aspects in the trading system/style that’s we’ve been developing. It’s what I (I think I stole the saying from Taleb), call being globally convex and locally concave. Breaking that down into the two parts, the two main parts of the trading portfolio.

The local concavity part represents our income portion. This portion has its main focus on risk reduction (a lowering of the volatility) by utilizing as much diversification as possible. We diversify by time of entry, type of trade, strike and naturally as it ages, by DTE. This gives us maximum diversification across the expirations and the option strikes. Older structures hedge off newer structures and so on. The income portion has 80+ entries per cycle. This gives us the best shot at having ability to have a low draw-down income campaign. It’s diversified by income type and by its hedging. By lowering the volatility tax we get better geometric returns and less draw-down and risk. The less time you spend recovering capital the more time and more capital is exposed to the supposed edge. Our income structures all have built in convexity (and this is different than our globally convex portion of the trading portfolio). This concavity structure, our income structure, has defined limited risk. It produces income and thus does have concavity but it is limited. It can be thought of as a rubber band that gets stretched, it can only get stretched so far until it snaps and the convexity of the built in black swan hedges are released. The amount of stretch represents the potential draw down (highest when you go from a low vol regime to a high vol) but that amount is dictated by time and as time goes on the maximum stretch goes down. For instance, the initial shock on our June structure through Jan 24 responds less and less to vol shocks now that we’re into March, in fact, it starts to act like a hedge. Having older and newer structures with different black swan locations and income locations give us a very smooth risk profile and limited ability for draw-down.

Our convexity structure is compromised of several parts including reactive and pro-active black swan hedging. It’s meant to provide return in market calamity above and beyond the income structure, acting as an additional hedge but also as a potential lotto for outsized returns. It’s also nuanced and diversified in its implementation.

Hence, we’re locally concave and globally convex and together all the parts provide us with reduced volatility within the portfolio allowing for better compounding (geometric returns) and less heart-ache, stress and better ability to action capital during market crashes due to the income provided by the black swan insurance.

Other than all that, on a personal side, I finally got the PPL, I flew back from Canada to LA and had done a few trips to Vegas and Arizona. Flying out of Van Nuys and into Vegas Class Bravo can be a bit overwhelming and intimidating but I got used to it. When I felt ready, I flew the family to Flagstaff Arizona which was a pretty cool 1st.

Then Ash and I went to Cayman for a week and saw friends we haven’t seen for a year. I think we might keep our house there now…it was way to nice (and fun) being back. We’re already planning our next trip in 10 days 🙂

4 thoughts on “Long Overdue Update”

  1. Great post Patrick! I’ve heard you discuss “local concavity, global convexity” in the past in PMTT, and this helped me understand it a bit more. Beautiful house!

  2. Excellent post Patrick. Agree with balancing the income portfolio with BSH and convexity. I remember watching your presentation in PMTT on BSH factory a couple of times and was wondering if you still manage the income portfolio with a combination of HS3 and STTBWB structures and build the BSH factory as per your discussion in that presentation?
    Thanks for sharing!

    1. Thanks Sam. I moved to using our favored income structures to pay for the BSH factory production. Namely a 488 combined with LPs. Why use short puts (the most unsophisticated) as the income to buy long puts? No matter how you slice it, we’re paying for the protection by taking initial risk with an income structure be it a short put or a BWB or a 48x structure. So why not use the most tested and sophisticated one we have? One could do it with HS3 or 488 484+2LP. or a mix there-in so you have diversity in the black swan insurance type.

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